Bankruptcy Myths and Facts
Many people facing tough financial situations are unsure about whether or not they should file bankruptcy. They ask many questions such as: Is bankruptcy going to hurt my credit score? Will bankruptcy get rid of all my debt? Will I lose my car or home if I file for bankruptcy? Do I have enough debt to file for bankruptcy?
These questions among others steer clients away from filing bankruptcy. The unknowns involved with bankruptcy scare clients away from what could be their best financial decision. Below details the bankruptcy myths and facts that may affect your decision to file bankruptcy.
Bankruptcy Myths and Facts
I will lose my home in a bankruptcy.
In most cases you will not lose your home. Exemptions are written into the Bankruptcy Code, and they allow you to keep certain assets after bankruptcy. You can keep your home as long as the equity in the property is exempted under the Bankruptcy Code. Even if your property is not fully exempt, you will still be able to keep it if you pay its non-exempt value to creditors under a Chapter 13 filing. Yet another way to keep your home is if you agree to keep making your payments on your mortgage until it is paid in full.
I will lose my car in a bankruptcy.
Your car, like your home, is a property that can be exempted under the Bankruptcy Code. As long as the equity in your vehicle is fully exempted, then you will not lose it in a bankruptcy. The large majority of vehicles out there can have its equity fully exempt. Even if it is not fully exempt, depending on which chapter you file under, you can pay its non-exempt value or continue making payments on the loan to keep it.
I will lose my retirement.
Again, there are exemptions under the Bankruptcy Code that protects retirement funds in pension plans and IRAs. Therefore, you are unlikely to lose your retirement savings.
I will never be able to rebuild my credit.
You can rebuild and establish your credit after filing a bankruptcy. First, it is important to understand that if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse, and in fact place you in a better position to pay your current bills. Paying on your current bills is one way to rebuild and establish new credit. A second way to do it is to use secured credit cards, which are deposit-based credit lines. A third way is to apply for credit cards. Lenders will usually send you credit card offers within 6 to 9 months after bankruptcy. As long as your bills are paid on time, your credit will be rebuilt.
I will not be able to obtain any more credit.
As your credit rebuilds (see above), your credit score will rise, and you will consequently be able to qualify and obtain new credit. Lenders look to your credit score to determine whether to lend you new credit. Having a bankruptcy blemish in the past is not an automatic disqualifier. You will be able to obtain new credit once your credit rebuilds.
I will not be able to buy a home.
You are able to buy a home after filing bankruptcy. The average waiting period is usually around 2 years, when you have rebuilt and obtained new credit. At that point, mortgage lenders can approve your application. As long as you stay on top of all your payments and do not over-extend yourself, you will eventually be able to get a mortgage approved after bankruptcy.
I make too much to file for bankruptcy.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 implemented a “means test” that is used to determine whether your income allows you to file a Chapter 7 bankruptcy. This means test only looks at the last six months of your income prior to the date of the filing. Sometimes, and large bonus you received during the last six months may disqualify you from filing a Chapter 7. Inversely, a drop in income within the last six months may qualify you for filing a Chapter 7. Even if your high income disqualifies you from filing a Chapter 7, you can always consider filing a Chapter 13 bankruptcy.
I have too much debt to file for bankruptcy.
There is no ceiling amount on the debt you have that prevents you from filing bankruptcy. No matter how much debt you may carry, you can file bankruptcy to discharge all your dischargeable debts.
My spouse and I must file bankruptcy together.
This is not true. The Bankruptcy Code does not require that spouses file together. However, there are advantages to filing a joint bankruptcy petition together. First, filing together decreases the cost of bankruptcy in terms of attorney’s fees and court filing fees. Second, you can double your exemption values if you file with your spouse. Finally, choosing not to file with your spouse may raise red flags to U.S. Trustees, since it is considered somewhat irregular to file without your spouse.
Creditors can still harass and sue me if I file for bankruptcy.
Creditors are prohibited from collection activities such as filing lawsuits, making phone calls, or sending letters, if you file for bankruptcy. This prohibition arises from the “automatic stay” injunction that is issued by the Bankruptcy Court when you file for bankruptcy.
I cannot file another bankruptcy if I already filed one in the past.
You can file for bankruptcy even if you have filed one in the past, subject to certain time restraints. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, if you have previously filed a Chapter 7, you can file another Chapter 7 if 8 years have passed since the previous filing. If you have previously filed a Chapter 7, you can file a Chapter 13 if 4 years have passed since the previous filing. Also, if you have previously filed a Chapter 13, you can file a Chapter 7 if 6 years have passed since the previous filing. Finally, if you have previously filed a Chapter 13, you can file another Chapter 13 if 2 years have passed since the previous filing.